Commodity bandwagon offers golden opportunity

21st January 2011

The Economist says that rising commodity prices are both a symptom of the world's economic recovery and a threat to it.

Among several serious effects, it can act as a tax on consumption, pushes up inflation globally and can, of course, lead to civil unrest. This is particularly true where food and fuel costs take a significant bite out of local average incomes. Just ask any former Tunisian dictator. But it is a problem for democracies too with concerns being voiced by politicians and populations across Asia, Latin America and Africa.

With all eyes on the financial crisis, some experts think that the impact of high commodity prices in 2007 has been overlooked.

The Economist notes that one University of California academic James Hamilton believes high oil prices meant that the US economy was shrinking in 2007 long before Lehman Brothers collapsed.

The article notes that as the US demand for oil increases it will find itself competing with an oil-hungry China further adding to price pressure.

Blog Viable Opposition looks in detail at what China's increased thirst for oil means for prices here.

There are also worries domestically in the UK. A recent Guardian report shows that manufacturers have seen a 12.5 per cent jump in the cost of raw materials.

It is not just oil of course – commodities as varied as copper and wheat and rice have been spiralling upwards.

In the UK, there are concerns that while central bankers are often urged to ‘look through' price spikes in commodities, i.e. not put up interest rates, partly because it has a limited impact on world prices, commodities can have secondary effects putting up prices more generally which will then require an intervention.

But if you are worried that commodities will put a break on economic growth what about investing directly to benefit from the boom? Well one veteran fund manager, and arguably one of the two best fund managers in the UK in the last couple of decades, Fidelity's Anthony Bolton, suggests that investors may have missed their chance, as he argues here in the Telegraph

Bolton believes that anyone wishing to benefit from commodity bandwagon should have jumped aboard years ago. Gold is different. He says it behaves more like a currency than a commodity. With many countries now relaxed about their currencies falling in value, gold is one of the few ways to hedge against this. The Chinese have also fallen out of love with US bonds, and are increasingly investing in gold too.

Commenter Goldcore, true to his name agrees.

"Bolton is extremely savvy and like other astute investors and savers has realised that gold is becoming re-monetised and an important safe haven currency again."

 

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